Japan refiners may cut capacity to meet new efficiency regulations

The refining sector may have to cut about 10% of capacity, as the Japanese government is set to impose new targets to boost efficiency and spur restructuring and mergers.

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By TSUYOSHI INAJIMA and EMI URABE

Bloomberg

Japans oil refining industry may be forced to
cut about 10% of capacity as the government is set to impose
new targets to improve efficiency and spur restructuring and
mergers.

Refiners will be required to increase the volume of
high-value fuels such as gasoline and diesel they produce in
relation to the output of low-quality by-products by either
renovating their facilities or reducing
oil-processing volumes, according to a draft of the Ministry
of Economy, Trade and Industrys rules released on
Monday.

The new targets may force them to cut about 400,000 bpd from
the countrys current 3.95 million bpd of capacity, the
ministry said.

The refining industry is very likely
to fall into a state of serious oversupply without
measures including cutting excess capacity, Meti said in the
report.

Japans oil demand has declined due to its shrinking
population and a shift to more energy-efficient cars,
prompting refiners to lower output. Further reductions would
be needed as about 22% of the countrys capacity would
be redundant by fiscal year 2018, Meti said in a separate
report today citing a study on the industry.

This is the second time in four years that the government has
forced the industry to improve efficiency. The ministry in
2010 required an increase in residue cracking-to-distillation ratios by the end of
March 2014. Most companies decided to scrap crude units
rather than invest in costly cracking facilities.

Refiners Choice

Refiners will be faced with a similar choice again, said Yuji
Nishiyama, a Tokyo-based analyst with JPMorgan Securities
Japan.

The biggest reason is money, Nishiyama said.
As it is questionable if building such a unit makes
sense amid declining demand, nobody would do it. Cosmo
Oil Co., which is partly owned by the government of Abu
Dhabi, spent about 100 billion yen ($987 million) to upgrade
its Sakai refinery, which started commercial
operations in October 2010.

Under the proposed rules, the average ratio of the
industrys capacity to process residues compared to
simple crude distillation should be improved by
the end of March 2017 to about 50%, from 45%now, according to
Meti.

Companies whose upgrading-to-distillation ratio is less than
45% would need to increase the proportion by 13% or more,
according to the new rules. Facilities with a ratio between
between 45% and 55% would be required to raise the proportion
by at least 11%, and those with 55% or more would need to
improve the ratio by at least 9%, according to the proposal.

New Definition

The new rules would allow the refiners to take into
consideration three types of units not covered by the 2010
order: fluid catalytic crackers, residue desulfurization
units and solvent de-asphalting units. Previously, only
residue fluid catalytic crackers, cokers and hydro-crackers
were counted.

Refiners will also be allowed to cut crude distillation nameplate capacity,
unlike the previous rule, which required them to close units,
according to the proposal. Meti would also allow refiners
that have merged operations to share reductions in a bid to
encourage restructuring. The companies will be required to
submit their plans by end of October.

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If Japan is looking for efficiency, they should look at mempore corp. as a provider of crude oil sweetening. They have discovered a nano-filtration membrane process for fractionating various oils at low temperature.